Risks When Industry Outsiders Acquire SMBs
Ted Leverette The Business Buyer Advocate
For decades: Helping people find and buy the right businesses the right ways. Avoid dumb deal. Make good deal. Everybody happy. OH YEAH! (I'm not a broker.)
Spoiler alert! Most buyers of SMBs do not have sufficient (or any) prior experience and knowledge about the kinds of businesses they buy.
In this article, you will see why some sellers, brokers, advisors, investors, and lenders shy away from searchers wanting to buy businesses outside their career experiences.
That’s why it’s necessary for potential buyers (i.e., searchers) to realistically self-assess their capabilities and expectations.
You can see some of this by attending my upcoming Zoominar: How Searchers Without Industry Experience Become Credible .
This article highlights some of the risks that can arise for everyone in all kinds of transactions. They are typically more pronounced in outsider transactions.
Risks for Buyers
Acquisitions led by buyers lacking industry-specific knowledge involve significant risks, but these can be mitigated with proper preparation, training, research, due diligence, and expert guidance.
I play a key role early on, helping searchers assess themselves and define acquisition criteria. We ensure buyers are prepared for success by encouraging them to consult industry experts, conduct thorough research, and plan for ownership transition, integration, and exit.
Your thoughts? How are you assessing risks and opportunities? Please comment below.
Risks for Sellers
Both buyers and sellers face significant risks when the buyer lacks industry experience or knowledge. To mitigate these risks and ensure a successful acquisition, both parties must conduct thorough due diligence, seek expert advice, and manage expectations. While industry outsiders can successfully acquire and grow SMBs, addressing these inherent risks through careful planning, transparent communication, and appropriate deal structuring is essential for a positive outcome.
Your thoughts? What other risks have you encountered in similar situations??
Others at Risk When Industry Outsiders Acquire SMBs
Brokers, advisors, investors, and lenders are on the front lines, exposed to numerous risks and challenges when facilitating deals involving industry outsiders.
Business brokers can play a crucial role in the M&A process, particularly when the buyer lacks prior experience and knowledge of the selling company's industry. Brokers share some of the risks shown in this article that particularly pertain to professional advisors. Plus a really big risk: Brokers don’t get paid for wasting their time, money, and reputation on searchers who won’t complete deals. (Not to mention the blowback when ill-informed and ill-advised buyers run their acquisitions into the ground.)
Savvy business brokers carefully balance their role as transaction facilitators while managing increased risks when working with industry outsiders. Success requires enhanced due diligence, clear communication, robust risk management strategies, and astute client selection.
Brokers can help all of us by sharing their opinions and experiences in the comments below.
Industry and professional advisors, such as lawyers, accountants, consultants, and technical experts can provide critical advice and guidance to both the buyer and the seller.
Advisors must carefully balance their duty to provide expert guidance while managing increased risks when working with industry outsiders. Success requires enhanced engagement management, clear communication, and strong risk mitigation strategies.
Here are some risks that they may face when the buyer lacks prior experience and knowledge of the selling company's industry:
Advisors: What are your thoughts on buyers migrating into industries new to them? Share your experiences and insights in the comments below.
Lenders play a critical role in the M&A process by providing financing to the buyer.
Here are some risks they may face when the buyer lacks prior experience and knowledge of the selling company's industry:
Lenders must adopt stronger risk management strategies when financing industry outsiders. This includes enhanced controls, detailed monitoring, and comprehensive support. These measures help ensure a successful acquisition, even when the buyer lacks industry experience, and better position lenders in case of borrower default.
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Lenders: What are your thoughts on financing deals where the buyer is new to the industry? Share your experiences and insights in the comments below.
Investors financing business buyer acquisitions of SMBs are particularly at risk where the buyer doesn't have sufficient (or any) prior experience and knowledge of the selling company's industry .
As an M&A consultant, I've observed critical challenges faced by investors, including private equity firms, family offices, searchfunds, and individual investors when backing inexperienced buyers.
Here are some risks:
Investors who finance buyers acquiring businesses outside their industry experiences and knowledge can enjoy profitable opportunities but it requires thorough due diligence, expert advice, and an awareness of knowledge gaps. Understanding the risks of backing a buyer with no industry experience is key to protecting capital and ensuring success. Enhanced risk management strategies—stronger controls, detailed monitoring, and comprehensive support—are essential for success.
Investors: What are your thoughts on investing in deals where the buyer is new to the industry? Share your experiences and insights in the comments below.
The Bottom Line
The key to successful acquisitions—whether in a familiar or unfamiliar industry—lies in building a useful support network, making informed decisions based on solid data, and being proactive in identifying and addressing risks before they materialize.?
And this, from me:
For decades, worldwide, I’ve evaluated, trained, coached, and advised searchers and buyers based on hundreds of done deals. My colleagues have shared information about thousands of searchers and dealmakers.
Not sure what to do?
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Preview my books:
21st Century Entrepreneur Ideas for Kids and Aspirational Adults (Complimentary)
How to Get ALL the Money You Want for Your Business Without Stealing It (USA and Canadian versions.)
Ted J. Leverette
The Original Business Buyer Advocate ?
“Partner” On-Call Network, LLC
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Learning about buying a business.
1 周Will there be a recording of your Zoominar? (I've registered.)